steel companies: It’s win-win situation for steel stocks: Amit Dixit

On the steel pack
The April hike was overdue. Look at how global steel prices have moved. The price of Chinese steel has gone up by almost $100 a tonne which is roughly 15%. But Indian steel prices have remained quite static. In fact, in March producers took a price cut of roughly Rs 1,000-1500. In the last three months, Indian steel prices have not gone anywhere. In fact, we have remained stable even in traders’ markets.

However, if you look at the global steel prices — not US and Europe which are in their own trajectory — of geographies such as South Korea, Japan and even regional prices, all have gone up by 16-17%. We have clearly lagged. Having said that, in the past, the landed cost of imports was supposed to be at par with domestic price. But now as a result of dichotomic movement, the landed cost of imports even from countries such as South Korea are at 10% premium. Clearly you have a good headroom for companies to take a price hike.

Now it depends on two things. One is the appetite in the domestic market and second is how much more competitive they are likely to remain with respect to exports. I believe we have got a good headroom not only of domestic steel price hike but there is a separate news flow on the possible hike in automotive contracts now. Both are playing a positive role and a major push on the sentiments.

On how much of a price hike can steel companies take

Amit Dixit: There are two parts to it. One is the domestic market and second is the export market. In the export market, the allocations made to exports in January was roughly 11% but with domestic demand remaining on the softer side, some of the steel players increased export allocations to almost 25%. This is very interesting because previously exports were at a discount to the domestic realisation but now the export realisations have moved up more.

For the first time export realisation is higher than domestic. Companies can actually export and make similar kinds of money. Why I say similar kinds of money is because freight rates have also moved up and so if you are not getting good realisation in the domestic market, you can get good realisation in the overseas market. In Vietnam for instance, you are getting $800 per tonne. In Europe, you are getting upwards of $900 per tonne. So, it is a win-win situation for steel companies. If the domestic market demand revises, they can supply in the domestic market. Else, there is the overseas market which is far more margin accretive.

JSW took over earlier, Now it has taken over BPSL. How would it enhance JSW’s portfolio?
JSW’s record is impeccable, at least in the domestic market. They have been very successful in doing so in the past. Secondly, it also gives them entry into eastern India which they were vying for quite a bit of time. They have procured an iron ore mine in Odisha. They should be able to improve the economics of this asset.

At this point in time, we have very limited financials of the company. We still do not know what the EBITDA is like and how much production they did for instance. So, I can’t really comment on EV/EBITDA side of it as far as the valuation goes but even if we look at asset based valuation, it is a little bit on the steeper side. So, there is an issue on valuation.

But having said that, in my view JSW would try to keep it off the balance sheet. They would try to keep a structure. There is very limited resource on their own balance sheet. It would be a little similar to the Monnet equity they accounted for. JSW should be able to do it and it would be a good asset for them. It depends on how they will be able to turn it around but looking at their past track record, they should be able to do it. But getting an asset at a steep valuation always gives you an elongated payback period and that is something I would watch out for.